BTC as Money Anchor

May 16, 2019

October 2018, Satoshi Nakamoto published the Bitcoin whitepaper. In the paper he addresses the Bitcoin system as a peer to peer electronic cash system. In another word, Satoshi wanted it to be a payment system that use the token BTC as Medium of Exchange and Unit of Account. In another word, a new money.

BTC as Money and Gold

Soon after its release, pioneers realized that being money is actually not feasible, as BTC has a predefined supply schedule that nobody can alter. Money is not just printed papers. The supply of money should be dynamically adjusted according to the demand of money, which is determined by the growth of the economics system that this money is serving. E.g. the supply of US dollars should be increased according to the growth of US economics. If US’s GDP grows for 10%, then the supply of US dollars should be increased for 10% accordingly. Otherwise we will face the money deflation problem that we encountered in the history for many times.

Besides of this reason, from a high level perspective, maintaining a money has a cost, which is hard to be covered with only the public blockchain system due to is decentralization nature.

So, BTC can not be money.

Gold is commonly regarded as a value preservation asset (aka store-of-value). It has a limited supply on this planet and cannot be artificially fabricated.

You may find these properties sounds familiar. BTC has all these nice properties as well and even better. Gold requires special techniques and environment to custody, which is a huge cost for individuals to posses it as investment asset. BTC is a digital formed asset, which means it is almost imperishable. It surely costs some electricity, but comparing to gold it enables self-custodian that you do not have to turn to third party institutions for custody service.

So, BTC can be the new gold.

BTC as Money Anchor

The fiats today are mostly credit based currencies, which means they are basically backed by national credit. The basic process of creating money is that first the government (treasury department) issues national debt, then central bank purchase the debt with paper money that they printed (or create deposits on the government account in the central bank). So the source of money is actually the debt of national government, which is actually backed by national credit with the calculated authorities and capitals (such as army and weapon).

The problem with the credit based currency is the opposite of the gold based currency, the inflation. As mentioned before, the currency inflation is supposed to be aligned with the economic growth, but credit based currency has a tendency of over inflation.

so it appears that purely credit based currency does not work very well either, then what will be the future of fiat?

I’m thinking maybe a money that use BTC as anchor. I.e. a balance sheet that has 20% BTC and 80% credit based asset on its left side. The presence of BTC on balance sheet would limit the inflation. Countries will have their own mining farms to yield BTC, whose distribution will not be limited by geographic like gold did. Isn’t it an appealing future?

You may argue that we already have such a history like this that use 20% gold and 80% credit for money making. Sure we did, but time has changed right? The history of money is history of human intelligence fighting against the human nature. As only humans ourselves, who konws what’s gonna work and what’s not. :)